Draft Double Taxation Relief and International Tax Enforcement (Canada) Order 2014
Draft Double Taxation Relief and International Tax Enforcement (Tajikistan) Order 2014
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Dakin, Nic (Scunthorpe) (Lab)
† Dowd, Jim (Lewisham West and Penge) (Lab)
† Drax, Richard (South Dorset) (Con)
† Gauke, Mr David (Financial Secretary to the Treasury)
† Goldsmith, Zac (Richmond Park) (Con)
† Hames, Duncan (Chippenham) (LD)
† Hemming, John (Birmingham, Yardley) (LD)
† Leslie, Charlotte (Bristol North West) (Con)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† Mosley, Stephen (City of Chester) (Con)
† Randall, Sir John (Uxbridge and South Ruislip) (Con)
Ruddock, Dame Joan (Lewisham, Deptford) (Lab)
† Sandys, Laura (South Thanet) (Con)
Shannon, Jim (Strangford) (DUP)
† Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab)
† Williamson, Chris (Derby North) (Lab)
David Slater, Oliver Coddington, Committee Clerks
† attended the Committee
Fourth Delegated Legislation Committee
Wednesday 19 November 2014
[Hywel Williams in the Chair]
Draft Double Taxation Relief and International Tax Enforcement (Canada) Order 2014
2.30 pm
The Financial Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the Draft Double Taxation Relief and International Tax Enforcement (Canada) Order 2014.
The Chair: With this it will be convenient to consider the draft Double Taxation Relief and International Tax Enforcement (Tajikistan) Order 2014.
Mr Gauke: It is a great pleasure to serve under your chairmanship, Mr Williams. The two draft orders deal with a first-time double taxation agreement with Tajikistan and protocols with Canada that amend our existing convention. I will attempt to anticipate the questions that the hon. Member for Newcastle upon Tyne North has prepared.
Let me begin with the new comprehensive agreement with Tajikistan. Negotiations began in 2013 soon after we learned that, despite earlier assurances, Tajikistan was not applying the agreement with the former Soviet Union. After two rounds of negotiations, we have an agreement that will restore certainty for UK businesses operating in Tajikistan with which we can be very pleased.
As is appropriate with a developing country, we have agreed to some source state taxation in dividends, interest and royalties articles, but the rates will be much reduced when compared with those that Tajikistan applies under its domestic legislation. In particular, we have achieved a 5% rate on dividends, pension funds and companies that have a 10% or more control of a paying company and a zero rate on interest paid to banks.
In most other respects, the agreement follows our preferences—for example, in determining the treaty residence of companies that are tax resident under the domestic law of both the UK and Tajikistan, the competent authorities can take into account a broad range of criteria in determining which country a company has closer links with. Looking more broadly than where the place of effective management is located prevents the rules being manipulated to facilitate tax avoidance. The agreement contains our preferred anti-avoidance rules that prevent it from being exploited to reduce tax payable on dividends, interest and royalties in circumstances other than those intended.
2.32 pm
Sitting suspended for Division s in the House.
2.57 pm
Mr Gauke: Before we were interrupted, I was setting out the ways that the double taxation with Tajikistan follows our preferences. I will give the Committee another example. The agreement contains an arbitration provision in the mutual assistance procedure article. Access to arbitration ensures that businesses and others can be sure that relief for double taxation will be available, even if countries disagree over the application of the agreement. We have introduced the latest OECD provision on exchange of information, which will enable the UK and Tajikistan to co-operate to prevent tax evasion and avoidance by their residents.
Turning to Canada, the protocols signed in July amend the 1978 double taxation convention for the fourth time. The main protocol is accompanied by a short, interpretive protocol that clarifies the understanding of certain technical aspects, such as how the convention will apply to UK limited liability partnerships and what is meant by “dealing at arm’s length”.
The protocols will introduce some helpful modernisations and update certain technical areas, encompassing changes in both countries’ tax rules and our approach to treaty policies since the previous protocol was signed in 2003. The main features are the extension of a zero rate on dividends to registered pension funds to which the 15% rate currently applies, the inclusion of an arbitration provision in the mutual agreement procedure article and the reduction of the interest withholding tax to zero in certain situations.
For the first time with Canada, we have introduced an assistance in collection article to enable the two countries to enforce debts when a taxpayer has absconded from one country to the other. We have replaced the articles on exchange of information and business profits with the new OECD version. Although disputes are rare, the insertion of an arbitration provision will aid dispute resolution.
An exchange of notes to accompany the protocols will set out the processes and procedures to follow where a case is submitted to arbitration under the mutual agreement procedure. The exchange of notes is being finalised. Taking the protocols forward now will avoid the loss of other benefits while the arbitration notes are finalised. I hope those explanations are helpful. I commend the orders to the Committee, and I am happy to answer any questions that right hon. and hon. Members may have.
2.59 pm
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Mr Williams. I thank the Minister for giving the Committee a thorough explanation of the orders and for providing briefings in advance to my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood), which I am assured were both interesting and useful.
I thank the Minister for covering many of the questions I was going to ask, but I have a few questions on which clarification at this stage would be helpful. In relation to the Tajikistan order, will he confirm when Her Majesty’s Revenue and Customs became aware that the previous order was no longer operational and whether an assessment
has been made of the impact of that on the Exchequer? In more general terms, what revenue impact does the Exchequer expect from the new order? Similarly, will he explain what revenue impact the Exchequer anticipates from the Canada order? That would be helpful to the Committee.3.1 pm
Mr Gauke: I thank the hon. Member for Newcastle upon Tyne North for her support. I am delighted that I was able to anticipate at least some of her questions and address them in my opening remarks.
Following the break-up of the Soviet Union, we received assurances from Tajikistan that it was honouring the treaty between the UK and the USSR. However, it recently became apparent that, in practice, it was not granting the benefits of that treaty to UK residents. The reason given was that it had never completed the procedures necessary for the treaty to have effect under its domestic law. Although that news was unwelcome, our priority was to ensure that arrangements for the avoidance of double taxation were put in place as soon as possible to ensure that UK businesses were not disadvantaged compared with their competitors in states that have concluded tax treaties with the independent Tajikistan. The agreement achieves that aim.
On the economic and revenue effects of these agreements —a familiar question for those of us who have attended similar debates in whatever capacity—double taxation agreements remove barriers to cross-border trade and
investment, so the effects of a specific agreement will depend on the extent to which activities change as a result of that. A DTA is therefore not a zero-sum game, as possible negative short-term revenue effects are offset in the longer term by increased activity.Given the long time scales, complex and shifting interactions with domestic law, large and unpredictable behaviour effects and the lack of a sensible comparator, it is not possible to produce meaningful estimates of the revenue effects of double taxation agreements, and successive Governments have never attempted to do so. I say that as someone who asked that question as an Opposition Treasury spokesman and, indeed, answered it on numerous occasions as a Treasury Minister. I can assure the Committee of consistency across government on that point. I hope that those remarks are helpful and that the orders will be supported by the entire Committee.
Draft Double taxation relief and international tax enforcement (Tajikistan) order 2014
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Tajikistan) Order 2014.